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Markets not yet convinced by rates cuts

AM - Thursday, 9 October , 2008 08:06:00

Reporter: Peter Ryan

TONY EASTLEY: Well, Britain's bail out and the extraordinary overnight interventions from central banks in North America and Europe represent emergency measures not seen since the Great Depression.

I'm joined in the studio now by our business editor Peter Ryan.

Good morning Peter. It seems share markets around the world aren't convinced that this is the solution?

PETER RYAN: Well, Tony, a new chapter of shock and awe from the world's central banks has simply underlined the depth of the crisis to use that Cold War term. The world's economies remain on Def Con One.

So, in New York, the Dow Jones had a wild ride of hope and gloom before closing two per cent lower.

In London the FT100 ended another five per cent weaker while markets in France and Germany dived around six per cent.

TONY EASTLEY: How have credit markets reacted to the lowering of global interest rates, and especially Gordon Brown's move to shore up the British banks?

PETER RYAN: Well, Tony credit is now in the deep freeze and the three month London interbank rate has doubled in two weeks to a record level.

David Buik of BGC Partners in London says the crisis is now not necessarily about liquidity but just when banks will get over their fear of lending to each other.

DAVID BUIK: Anybody hoping for a quick fix, forget it. This is going to take two or three months to filter through to the end user. To see the trust returned partially amongst the banks, and it still got a long way to go, and together with access to, as I would describe, Henry Paulson's cesspit, where hopefully they can drop some of their toxic assets. We are in for a long, tough winter.

TONY EASTLEY: David Buik of BGC Partners in London.

Peter Ryan, how risky is the strategy of cutting rates, you know especially in the current environment and how is Australia better placed as we are being told we are?

PETER RYAN: Tony, this is a game of how low to zero central banks can cut rates. For example rates in the US are now down to one and a half per cent - close to the one per cent level that many economists say was a key reason for the sub-prime crisis in the first place

Here in Australia, the Reserve Bank cut by one percentage point to six per cent on Tuesday. Australia's rates have been high but that is because the RBA has been battling inflation.

So here we have a lot of room to move and economists are tipping the official cash rate could fall to four per cent by the end of the cutting cycle.